RBI suggests cap on coupon of rupee-linked overseas bonds

The limit has been set at not more than 500 bps above yield on the G-sec

Investors of rupee-linked bonds issued overseas can hedge both the foreign currency risk and credit risk through permitted derivative products in the domestic market. The cap for pricing these bonds has been set at not more than 500 basis points (bps) above yield on the government bonds of corresponding maturity, according to the Reserve Bank of India (RBI)'s draft norms.

In RBI's first bi-monthly monetary policy for financial year 2015-16 held in April, the central bank had put forward its intention to expand the scope of issuance of these bonds by international financial institutions as also to permit Indian corporates, eligible to raise external commercial borrowings (ECB), issue such bonds with an appropriate regulatory framework.

According to RBI, Indian corporates who are eligible to raise ECB are permitted to issue rupee-linked bonds overseas. "The corporates which, at present, are permitted to access ECB under the approval route will require prior permission of RBI to issue such bonds and those coming under the automatic route can do so without prior permission of RBI," said the central bank. However, RBI said that banks incorporated in India will not have access to these bonds.

The bonds may be floated in any jurisdiction that follows Financial Action Task Force (FATF) norms. Besides the subscription, coupon payments and redemption may be settled in foreign currency. The proceeds of the bonds can be parked according to the extant provisions on parking of ECB proceeds.

RBI also said the amount and average maturity period of such bonds should be according to the extant ECB guidelines. Over and above that the call and put option shall not be exercisable prior to completion of applicable minimum average maturity period. The end-use restrictions will be as applicable under the extant ECB guidelines, said RBI.

For dollar-rupee conversion, RBI's reference rate on date of issue will be applicable.

RBI said that international financial institutions of which India is a shareholding member intending to deploy the entire proceeds of the issuance in India would not require prior permission for the issuance of rupee bonds overseas irrespective of amount of issuance. However, in other cases where an international financial institution of which India is a member wishes to retain the freedom to deploy the issue proceeds in any member country, it would require prior permission from the government or RBI.